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What is capital management and does your business need it?

Business

What is capital management and does your business need it?

Capital management is the process by which companies of all sizes, whether SMEs or multi-national corporations, attempt to maintain a balance between the levels of current assets and liabilities and working capital in order for them to continue trading successfully and, if necessary, expand and grow. Maintaining a healthy cash flow is the lifeblood of any enterprise and is essential if it is to pay its suppliers and workforce on time. Having good capital management procedures in place is the only way to recognise upcoming issues and act in a timely manner to prevent a potentially catastrophic situation from developing.

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As the country recovers from recession and companies in all sectors begin to look towards a period of sustained growth, it is more important than ever to implement a capital management strategy that will maximise the funds available to finance additional staff and investment in new equipment or larger premises. If outside funding is required, potential investors will expect to see that a robust system of financial controls is in place before they will even consider moving forward. For example, there are private equity investors such as Seychelles based Crimson Investments, which works with companies with earnings before interest, tax, depreciation and amortisation (EBITDA) of between £3m and £27m, along with providing venture capital for start-ups. Images from Mukesh Valabhji, the company’s CEO, depict a businessman who is confident and successful and who takes a careful and measured approach to the businesses he is willing to work with.

In today’s ultra-competitive market, no business owner can afford to ignore capital management. The level of cash flow cannot be guaranteed, so it is essential to pay suppliers on time and negotiate prompt payment discounts. Taking this course of action not only ensures they will put the company to the top of their list of accounts to be paid, but it will also improve profit margins. Similarly, by building a prompt payment discount element into sales quotations, the inward flow of cash will be improved and credit control department staff will spend less time chasing slow payers. It is important to stress to both purchasing and sales teams that they must negotiate the best prices possible with clients and suppliers; every pound saved adds up over the course of a year, especially when profit margins are tight.

Having a highly qualified accounts department team also pays dividends, as it is here that the first warnings of impending financial issues will be flagged up. In the beginning, providing on-going training for key staff may appear an expensive luxury, but over the longer term, the knowledge they gain may one day help avert a potentially disastrous situation from developing. It is also worth considering having senior purchasing and sales staff learn a little about how the company operates and the part the finance department plays in maintaining its overall wellbeing.

When the nation’s economy is growing and profit margins are high, implementing strategies such as capital management tend to be put on the back burner. It is only when there is a downturn or a more efficient and effective competitor appears on the scene that business owners realise, often too late, that they should have acted long ago.

I am the founder of Startup Today. I am the main writer and have put in many hours of work into creating this blog. If you want to find out more about me then lets get in contact.

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